Magazine | July 30, 2018, Issue

Funding the Family

Joshua T. McCabe
The Fiscalization of Social Policy: How Taxpayers Trumped Children in the Fight against Child Poverty, by Joshua T. McCabe (Oxford University Press, 240 pp., $65)

Since the 1940s, Canada and the United Kingdom have had some type of “family allowance”: Parents unconditionally receive money from the government, either in cash or as a tax credit, simply to reflect the costs of raising children. The United States, despite strong historical ties to both these nations, has no such thing. In the U.S., taxpaying parents can benefit from the child tax credit, but parents poor enough not to owe taxes are left to welfare programs.

The question is why. Two common explanations are that American conservatism is uniquely strong in its objection to anti-poverty spending, and that American racism has motivated politicians here to minimize benefits to the poorest families, which are disproportionately black. But in this book, Joshua T. McCabe argues for a third proposition: The divergence is an accident of history produced by a lazy decision on FDR’s part.

One can never truly prove a historical counterfactual. But McCabe makes a decent case. And perhaps more important, he provides crucial historical and international context to the battle over the child tax credit that played out late last year as Republicans worked out the details of their tax bill.

During World War II, Canada, the U.K., and the U.S. found themselves in a similar boat in a key way: When the war ended, they wanted to avoid the economic downturn they had experienced in the wake of World War I, and to protect families from the financial pressure that could result if they failed. The U.K.’s “Beveridge Report,” released at the end of 1942, completely transformed the debate over how to address this conundrum.

The report proposed a social-insurance system with family allowances as a major part of its foundation. These allowances would continue to provide income when people lost their jobs, and would especially help larger families. Most crucially, because they wouldn’t be taken away when someone went back to work and started bringing in his own income again, they ensured that work would always pay more than unemployment.

McCabe describes the report as a “benchmark event”; the document “fundamentally changed the terrain of social policy” as it “made its way through a powerful transatlantic network of policy reformers.” Canada and the U.S. soon faced pressure to come up with their own Beveridge Reports. Our neighbors to the north whipped one up in short order, and it also included child allowances — a departure from the Canadian government’s prior plans. Here, though, FDR took a shortcut.

The National Resource Planning Board had put together a report called “Work, Security, and Relief Policies” before America entered the war — it was submitted three days before Pearl Harbor — and members of the administration had been pressuring the president to release it. So he did, and it became known as the “American Beveridge Report” despite having been completed a year before the U.K. original. It didn’t include family allowances, instead promoting Depression-era policies such as public employment. Thus family allowances never even made it onto Congress’s radar.

McCabe argues that this decision had consequences that persist to the present day. Had FDR pursued family allowances as his counterparts abroad had, in this view, the idea would have been as politically successful here as it was elsewhere. This is entirely possible — a true “American Beveridge Plan” may have passed back then, as the ideological currents preventing such a thing today were not so strong at the time. And if it had passed, it would most assuredly still be with us. Conservatives have long lamented the fact that it’s practically impossible to shrink or eliminate an entitlement program once the checks start clearing.

But that leaves us with the question of why we still don’t have family allowances 75 years later. To address this, McCabe explores the subsequent history of welfare policy in the three countries, arguing that family allowances institutionalized a different way of thinking about taxes and public assistance.

In McCabe’s schema, there are three different reasons policymakers might have for putting more money in parents’ pockets. (A sociologist, he insists on calling these “logics of appropriateness.”) One is tax relief. Another is “income support,” a.k.a. poverty relief or welfare. And yet another is “income supplementation,” meaning the money simply reflects the costs of raising children.

This last one is the concept that’s institutionalized in Canada and the U.K. but not here. In the U.S., any benefit must necessarily be either tax relief or welfare — once you get back more from the government than you pay in taxes, you’re on welfare. Oddly enough, policymakers are fine with “targeted” tax breaks that subsidize sympathetic populations such as parents. But they insist on limiting these subsidies to net taxpayers and handling the poor through other, more stigmatized programs. And this distinction has only sharpened in the U.S. over the years, as the concept of “income supplementation” has solidified elsewhere.

McCabe shows how policymakers in Canada and the U.K. were able to draw on the legacy of family allowances and the concept of income supplementation as they faced the same trends and pressures that the U.S. did. When the “stagflation” of the 1970s put pressure on family budgets, part of the problem manifested itself in the erosion of family allowances. (In the U.S. the “creep” of tax brackets was a more prominent concern.) When voters and creditors insisted on austerity, family allowances could be converted to tax credits so they’d be treated as “revenues not collected” rather than spending — but they were still universal, and those with no tax liability received the money as a check. When a demand for welfare reform reached its apex in the 1990s, Canadians saw expanding allowances as a way to “take kids off welfare,” because they didn’t see the allowances as welfare in themselves.

And that brings us to the United States’ nonrefundable child tax credit, which began in 1997, and the fight over its expansion in the recent Republican tax bill. Twenty years ago conservatives insisted on giving the credit only to taxpayers, so as not to blur the line between tax relief and welfare. And while the recent bill doubled the credit, it too is limited to net taxpayers.

Senators Marco Rubio and Mike Lee, though, forced a confrontation between the party’s pro-business and pro-family wings. They didn’t suggest making the credit fully refundable, but merely tried to make it refundable against payroll taxes in addition to income taxes, so that more poor families could use it. (The “additional child tax credit” already served this purpose, but it offset payroll taxes only partially and wasn’t available at all to the very poorest families.) This could have been funded by slightly trimming back the bill’s corporate-tax cut, reducing the rate to 20.94 percent instead of 20 percent (from 35 percent). Most Republicans voted against Rubio and Lee’s amendment, and most Democrats refused to help out despite supporting the change. Republicans cared more about corporate tax cuts, and Democrats cared more about doing political damage to Republicans.

Where should we go from here? McCabe sees family grants as the key to reducing child poverty (which America, in his view, almost entirely fails to do), and he’d plainly like to see Americans sign on to the concept of an “income supplementation” that manages to be neither tax relief nor welfare. Given current political realities, his main suggestion is a revenue-neutral consolidation of various already-existing child benefits (from the child tax credit to food stamps) into a simple, refundable tax credit.

On that, at least, McCabe should have some support on the right. Personally, I love the idea; I proposed the same thing in a 2014 National Affairs piece. But I have some nits to pick with McCabe’s broader analysis.

For one thing, while America no doubt has a smaller safety net than many other countries do, McCabe likely overstates the problem when he relies on a 2012 study from UNICEF. The study claims that, circa 2008, the safety net reduced the child-poverty rate only from 25 percent to 23 percent in the U.S. (versus 25 percent to 13 percent in Canada and 33 percent to 12 percent in the U.K.), but this finding is incredibly sensitive to the methods and data one uses. A 2015 report from the liberal Center on Budget and Policy Priorities, for instance, found that the American safety net reduced child poverty from 30 percent to 18 percent in 2012 — and all the way to 14 percent when correcting for people’s tendency to underreport the welfare benefits they receive. A widely cited 2013 paper from a group of Columbia University researchers reached a similar conclusion.

Our safety net is hardly perfect in how it targets its spending, but one should not pretend it does practically zilch for low-income families with children. This country runs countless programs to help the poor, and those programs spend hundreds of billions of dollars a year.

In addition, McCabe neglects what is, at least from a movement-conservative perspective, the best argument for child-related subsidies — and it sure isn’t “income supplementation,” which at this point I suspect American conservatives will forever see as rank socialism. He notes that the economist Robert Stein inspired Rubio and Lee’s ideas, but he doesn’t flesh out Stein’s argument, which Ramesh Ponnuru has also made numerous times in these pages: People depend on their parents when they’re young and on their children when they’re old, but our old-age entitlements have socialized the second part of that bargain. As a result, when parents raise children, they are nurturing future taxpayers who will support not just them but everyone in retirement. The child tax credit merely reimburses this contribution.

This logic suggests that the credit should be refundable — if someone has no tax liability but still contributes to the entitlement system by raising children, he is in effect overpaying his taxes and should get that money back. And as Stein explained when challenged on this point four years ago, his own proposal was nonrefundable not out of spite, but simply because other programs already serve this function for the poor (i.e., parents get more in food stamps, etc., than non-parents). One could just as easily address this problem by consolidating the child-related portions of those programs into a universal child tax credit, as McCabe, yours truly, and others have suggested.

Finally, McCabe ignores or downplays some legitimate criticisms of universal benefits. While they are pro-work in the sense that they aren’t taken away as people earn more money for themselves, they’re also anti-work because, well, they make it easier to get by without working. They also make it easier to support children without a spouse. At the very least, consolidation should focus on combining the benefits that have the weakest work requirements. And especially if child benefits are someday significantly expanded, conservatives might reasonably insist on adding some sort of work requirement (or even marriage incentive) to the child benefit itself.

Quibbles aside, however, McCabe has provided an intriguing theory about why America’s safety net looks the way it does — and why two closely related countries do things so differently. His book deserves a careful read by those concerned about family-oriented public policy.

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